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WC & GL Basis of Premium

INTRODUCTION

Although payroll is the principal basis on which premium is computed for Workers Compensation coverage, it is important to remember that payroll is more than just a figure in a payroll earnings book. This section broadens and clarifies the definition of payroll so that the term more accurately describes the premium basis. Most of the major inclusions and exclusions to payroll are covered in this section. State manual pages should be consulted for exceptions in the particular state being audited.


BASIS OF PREMIUM - TOTAL PAYROLL

Primarily, the basis of premium for Workers' Compensation is payroll. The Workers Compensation Manual states: Premium is computed on the basis of the total payroll paid or payable by the insured for services of individuals who could receive workers compensation benefits for work-related injuries as provided by the policy. This could have the effect of broadening the premium base by a considerable amount. By definition, payroll means money or substitutes for money.

Exception:

Some classifications have a different premium basis. For example, premium for the domestic worker classifications is computed on a per capita basis, for vehicles hired under contract, the premium basis is a percentage of the total contract price, a per passenger seat surcharge is charged in addition to the premium developed under Code 7421, for logging and lumbering operations, the premium may be computed on an upset payroll rather than the actual payroll amounts. These, and other premium basis alternatives, will be discussed later in this material.


PAYROLL INCLUSIONS

Payroll includes the following items:


Wages or Salaries Including Retroactive Wages or Salaries

Wages or salaries should be self-explanatory. The inclusion of retroactive wages or salaries within the definition merely clarifies a previous procedure that was never actually stated.

Subject to certain exceptions, wage and salary payments made during the policy period are usually included in the audit. This also includes retroactive wages. For example, an increase in pay declared for an employee during one policy period but paid during a later policy period is generally included in the employers audit when the wage increase is actually paid. It should not be expected that the carrier of record on the earlier policy must revise its audit at a later date to include these retroactive wages. The carrier of record when the payment is made would include the wage increase.

Note, however, that the Basic Manual provides that premium shall be computed on wages paid or payable. Occasionally a carrier will include in its audit a declared, but not paid, wage increase. If such a situation arises, the insured must provide documentation and verification of this wage inclusion before you exclude these retroactive wage


Commissions and Draws Against Commissions

Many employees are paid on a salary plus commission basis, a straight commission basis or a drawing account against commission. Such employees might include:

SalespersonsDrivers for laundries, bakers, bottling companies, oil and gas distributors, milk dealers, etc. This applies whether they drive their own automobiles or those of their employer.

When a wage schedule involves both a salary and commissions, the auditor will include the salary plus the commissions paid during the policy period. If the contract of hire involves salary plus commissions and a commission is earned but not paid during the policy period, the earned commissions should be included in the employee's wage when calculating the entire payroll for that employee.

When a salesperson is paid on a straight commission basis and works solely for the insured, it is necessary that the auditor determine the full amount of commissions paid. One such method is to examine the insured's tax file including IRS forms W-2 and 1099. If a salesperson is paid on a commission basis and also represents other concerns, his/her status as an employee or an independent contractor depends upon the facts of the individual case (employment status will not be pursued here; that, in itself, is a subject that can be pursued at length). If an employer-employee relationship is established, the full amount of commissions paid by your insured should be determined, as mentioned earlier.

If the contract of hire provides for the payment of commissions only and no commissions are earned, an amount equal to the average earnings of the other salespeople should be included.

This fair market value inclusion is subject to any state exceptions that may exist. When the individual has been employed for a period of less than one year, a pro-rata representation of wage should be applied based upon this individual's term of employment.

Salespersons are often hired under a contract calling for a drawing account against commission. If the commission is less than the drawing account, or if no commission is earned, the drawing account should be included in the premium base. If the commission earned, but not paid, is greater than the drawing account, the commission earned should be included.

The insured generally pays the traveling expenses of a salesperson who receives only a salary. In such a situation the expenses should not be added to the salary for premium computation purposes, provided a separate, verifiable record of them is maintained.

If a salesperson pays his/her own traveling expenses and is employed on a salary, salary plus commissions, or commissions only basis, the expenses incurred in this employment, including the operation of a vehicle, may be deducted when the following conditions apply:

Itemized expense accounts, either weekly or monthly, are submitted to verify the expenses, andThe insured maintains a separate, verifiable and permanent record of these accounts.

Further detail on the inclusion or exclusion or expenses for commissioned salespersons is provided later in this material.


Bonuses Including Stock Bonus Plans

A bonus is something given in addition to what is usual or strictly due. While a bonus may be given at any time, traditionally it is given at Christmas time or at the company's year end. Except for bonuses awarded as a special reward for individual invention or discovery, the amount of bonuses is to be included in total payroll. Industry practice indicates that even though services performed may cover two policy periods and are payable to the employee, bonuses are not prorated for inclusion between two or more policy years but are included in their entirety during the policy year when paid.

For executives and other high-ranking company staff members, the bonus may consist of shares of corporate stock in lieu of a cash payment. These stock shares are considered a substitute for money and the valuation should be included as payroll.

A special caution must be mentioned in light of recent rulings regarding bonuses in certain states. In Oregon, "unanticipated" bonuses are no longer includable in the payroll of an employee. Unfortunately, unanticipated was not defined. In Tennessee, bonuses, including stock bonus plans, are only included in the premium base when paid in lieu of wages and specified as part of a wage contract. If both requirements are not met, the bonus is excluded


Extra Pay for Overtime Work

The inclusion of extra pay earned for overtime work reflects the fact that injuries can also occur after the normal number of hours worked. Because of the complexities and special guidelines that pertain to overtime, a separate rule pertaining to overtime is included in the Basic Manual. This item is reviewed later in this material under the section on Overtime.


Wages for Holidays, Vacations or Periods of Sickness

The Basis of Premium rule of the Workers Compensation Basic Manual includes pay for un-worked holidays, vacations or sick time as payroll for premium determination. Some union contracts require employees to be paid for un-worked days for jury duty, funerals, weddings, birthdays, etc. Under such circumstances, this pay would be included as payroll. The auditor should be cautious of the method the insured uses to account for these items. Often, these items are shown as overtime on an insured's records, therefore, it is important to verify the content of the records.

The auditor is reminded that the inclusion of pay for "periods of sickness" is not intended to include third-party sick pay. Only those amounts received from the employer are included.

The Worker's Compensation Basic Manual provides several examples that deal with work performed during paid vacations and on paid holidays. Refer to the Basic Manual Users' Guide Rules 2-C-1 and 2-C-2-b. These examples are reprinted here:

Q. There are instances where an employee works during his or her paid vacation period or on a paid holiday and receives straight time pay in addition to his or her regular vacation or holiday pay. What is deductible?

A. No deduction is permissible because under the Basis of Premium rule; un-worked vacation pay or holiday pay must always be included in payroll, and in this case we are dealing only with the actual pay during the worked vacation period, none of which constitutes overtime.

Q.  An employee is normally not required to work on a holiday but is paid for the holiday at the regular rate. If he or she does work on the holiday, he or she receives additional pay at time-and-a-half, resulting in his or her total pay then being 2 1/2 times regular pay. What is deductible?

A. One-fifth of his or her total pay (being the "2" of the "22") is deductible. The Basis of Premium rule includes pay for any wages paid for un-worked holidays. Also, that portion of the time-and-a-half pay that represents straight time contains no element of deductible overtime. The balance of this pay, however, is deductible because it falls within the scope of the exception to the basic principle pertaining to work performed on Saturdays, Sundays and holidays.

Once again, the auditor should also be aware of state exceptions to this inclusion item. Currently, Kansas and South Dakota contain exceptions to this inclusion item.


Payments by the Employer of Contributions Required by Law

Payments by the employer of amounts that would have been withheld from employees to meet statutory obligations should be included in the employee's payroll. Such payments are an inclusion.

Examples of this type of payment would be statutory insurance or statutory pension plans, such as the Federal Social Security Plan. It is typical of many union contracts that the employee share of the FICA payment is not deducted from the employee's wages; it is paid by the employer. When this occurs the auditor should add to the employee's earnings those payment amounts made by the employer on behalf of the employee. As always, state exceptions should be monitored.


Payments to Employees Made on any Basis Other Than Time Worked

This includes, but is not limited to, the following items:

1. Piecework - In this system, an employee is paid on the basis of the number of pieces of work produced, subject to an agreed upon wage. The principle behind this payment schedule is that an employee, by working efficiently, can earn more money on a piecework basis than could be earned on an hourly wage basis. Usually, increments are paid upon completion of established quotas. Note, the Basic Manual provides clarification that these increments should not be treated as overtime:

Q. In the case of piecework, is any part of the payroll deductible as overtime?

A. If the rate of pay per piece is increased after the employee works the normal number of hours, the excess portion above the regular piece rate, earned during the extra hours worked, should be treated as overtime. An increase in the piece rate for increased production within the normal working hours should not be treated as overtime.

2. Incentive Plans - This system, like the piecework system, is designed to stimulate a higher rate of production on the part of the employee. Basic in such a plan would be an increase in an employee's hourly rate of pay after a pre-set quota of units of work has been completed. The auditor will include straight time wages plus the wages from the incentive increment.

3. Profit Sharing Plans - Again, such plans are designed to stimulate greater and more efficient production as the employer will distribute among the employees profit above a certain level. The auditor will include all income from the profit sharing plan. Florida,Louisiana and Oregon do not permit the inclusion of voluntary profit sharing plans in payroll.


Payments or Allowances to Employees for Hand or Power Tools Furnished by Employees

In some trades it is customary for the employer to grant a monetary tool allowance to employees who furnish their own hand or power tools for use in the employer's work or operations. Such allowances are included when determining an employee's total payroll.

State exceptions for this tool allowance item do exist. Kentucky excludes allowances for employee provided chain saws when used in the operations of a logging insured. Maine excludes expense reimbursements made to employees for use of chain saws.


Housing

As a condition of many employment agreements, an employee may be provided an apartment or a house at no charge, or at a substantially reduced amount. The value of these accommodations are includable when calculating total payroll. This value is determined by using actual rentals of similar accommodations in the vicinity. Nevada applies a minimum value per month.

In the case of clergymen or for teachers at some schools, the church or school budget will contain an amount for a housing allowance. If this amount is consistent with the value of similar housing in the vicinity, it should be added to the employee's wages to obtain payroll. If it is apparent that the budgeted amount is not consistent with the value of similar housing in the vicinity, however, the budgeted amount should be increased to bring it in line with the value of similar housing. The value of housing, paid utilities, gasoline, milk and farm produce provided to a farm employee must be established on the basis of the market value in the area involved.


Lodging

Lodging is distinguished from housing as follows: lodging constitutes temporary shelter while on assignment for an employer; housing represents the permanent abode of the employee that is used as the "headquarters" from which he/she works.

When the value of lodging constitutes part of an employee's earnings, the value of the item, to the extent disclosed in the insured's records, shall be included with the actual wages as payroll. Lodging is not included in Arizona. Montana applies a minimum amount as does Nevada, New Jersey and Wisconsin. California excludes the value of lodging unless the classification wording requires, if provided in lieu of wages, or wages are reduced by the value of the lodging.


Meals

To the extent shown in the insured's records, the value of meals received by employees as part of their pay is included for premium computation purposes, except in Arizona. If the value of meals is not shown in the records, the value of those meals is not to be included in payroll. Montana applies a minimum amount as does Nevada, New Jersey and Wisconsin. California excludes the value of meals unless the classification wording requires, if provided in lieu of wages, or wages are reduced by the value of the meals.


Store Certificates and Other Substitutes for Money

Other substitutes for moneymight include gift certificates, catalog accounts, or merchandise credits. A gift certificate entitles the employee to apply the dollar-limited amount stated on the document toward the purchase of merchandise at the store or shopping mall issuing the certificate. The store is chosen by the employer. In a similar situation, the employer may provide a dollar-limited certificate issued by a national credit organization. The employee can use the certificate to purchase items from any vendor that accepts that organization's credit card.

In a merchandise credit plan, the employer establishes an account for the employee(s) at a local store or shopping mall. The employee may make purchases of merchandise up to the limit in the account. The advantage of this plan over the store certificate is that the employee does not have to exchange the certificate; the store merely credits the account. Also, if the plan is ongoing, the employer can continue to contribute to the account.

The catalog account is a combination gift certificate, merchandise credit program. The employer establishes an account, with a national mail order or catalog store, in the employee's name. The catalog is then used by the employee to purchase the desired merchandise.

Any such plans, provided by the employer in lieu of wages, would be included in the payroll base for premium development. Though the plan may be a regular condition of employment, employers might adopt such programs at Christmas or fiscal year end instead of a monetary bonus. In these cases, the plan would be treated the same as a monetary bonus and included unless the state has an exception to the inclusion of a bonus. Note, however, if the substitute for money is given as a bonus for an individual invention or discovery, this amount would not be included.

These items may not be found on the payroll records of the employer. Their existence is generally established by asking several questions of the insured who usually maintains a separate journal or other record of gift certificates or merchandise credits. The auditor should verify the existence of these substitutes through proper questioning and auditing procedure.

Frequently, mercantile establishments will give employees the opportunity to purchase store items at a specified percentage reduction off the retail price. This discount is a common fringe benefit or perk and should not be included as perks are excluded from payroll.


Payments for Salary Reduction, Retirement or Cafeteria Plans

A Flexible Benefit Plan permits employees to participate in a salary reduction program, the specified amount of money being channeled to purchase qualified benefits with pre-tax money. Obviously, the use of such a program increases the purchasing power of the individual when compared with the use of after-tax dollars.

It must be noted that this program does not cover all of the benefits that may be offered by the employer. Covered benefits generally include out-of-pocket medical, legal, and dependent care expenses. For example, suppose a couple anticipates moving to a larger house during the coming year. To help defray some of the legal costs associated with a house closing, one of these individuals specifies an amount of pre-tax dollars to be deducted from his/her gross paycheck. Once the house is closed, the employee will seek reimbursement (up to the total amount specified to be deducted) for these legal costs.

One major drawback to this program is its use it or lose it provision. The unused portion of the employee's salary reduction amount cannot be returned to the employee. If, for example, the house in the above example is delayed and not closed during the year or the closing costs are less than what was anticipated by the employee, the money collected but not used as reimbursement will not be returned to the electing employee. The money contributed by employees through such a payroll reduction program should be considered payroll.

A Cafeteria Plan works in a similar fashion. Cafeteria plans may vary but they generally consist of basic group insurance coverage(s) provided by the employer for the benefit of the employee. Also, the employee is generally given the option to purchase additional coverage such as medical insurance for a spouse or family or additional coverage benefits such as dental insurance. The payment for these additional coverage options may be deducted from the employee's wages or the employee may reduce his/her vacation or holiday schedule by working on these time-off days to satisfy the premium requirement. Most plans allow for a payment using either of these two methods, or any combination thereof.

Basic Manual Rule 2-B-2-b excludes from payroll those premiums paid by the employer to a group insurance plan but does not exclude the group insurance premiums paid by the employee. When the employee pays a portion of his/her group insurance premiums, or makes other cafeteria plan purchases, such employee amounts shall be considered as payroll. The employee's salary before reduction is the includable amount.

NCCI has been asked to consider various benefit plans and, in part, concluded: "When the employer makes a specific amount of money available to the employee and suggests same be used to purchase group insurance, any portion of that allocated amount actually used to purchase group insurance should be excluded from payroll. However, should the employee receive any unspent portion, that additional amount received from the employer is to be audited as payroll." Additionally, any unspent funds that are deferred into a tax-sheltered annuity for the individual employee's personal benefit shall be audited as payroll.


Davis - Bacon Act Payroll

The Davis-Bacon Act is a 1931 Federal law that requires contractors working on Federal or Federally funded projects to adhere to wage schedules established by the Department of Labor for the local area where the job is let. Though the wage schedules vary by trade and by location, two minimum wage rates are included, (1) a base wage, and (2) the prevailing wage. The base wage is generally the wage or hourly amount which must be paid to the employee as salary. The prevailing wage is a higher amount which consists of the base wage and an amount normally encountered as fringe benefits for the area in which the work is being performed.

The law's original intent was to protect workers by placing a floor under construction wages. This floor prevented contractors from importing workers from other areas where the wages were lower than those of the particular community where the project was being let. Proponents of the law also assert that cheap labor will produced results that are less than desirable.

Opponents of Davis-Bacon view it as out-dated and inflationary because it sets artificially high wages that put an upward pressure on all local wages. It is also alleged that many qualified contractors avoid federally financed projects due to the record keeping costs and the problems encountered in paying some people more than others on a particular job.

Despite the controversy, an employer awarded a contract subject to the act is, in effect, agreeing to adhere to one of the following options:

1. The contractor pays the entire prevailing wage as salary,

2. The contractor pays the established base wage and provides acceptable fringe benefits, or

3. The contractor pays the base wage to the employee and places the difference between the base wage and the prevailing wage into a third-party pension trust fund for the exclusive and irrevocable benefit of the employee.

When an employer pays the fringe benefit portion of the prevailing wage as salary (#1) or when they opt to place the difference to a third-party pension trust fund for the benefit of the employee (#3, usually a 401A account), the entire Davis-Bacon wage should be included as payroll. The first should be self-explanatory; option #3 may require an explanation.

Note the wording of option #3, the difference between the base wage and the prevailing wage is placed into a third-party pension trust fund for the exclusive and irrevocable benefit of the employee. This is not the employers money, this money belongs to the employee, it is his/her wage. Additionally, the money placed in this fund is not voluntarily given, a condition of the exclusions which will be discussed later, but is a requirement of any contractor that receives work subject to the Davis-Bacon Act.

When a contractor opts to pay the base wage as salary plus provide acceptable fringe benefits (#2), the fringe benefits would be excluded from the development of chargeable payroll as outlined by the Basic Manual rules.


Annuity Plans

An annuity ordinarily is insurance that an employee purchases which will provide defined regular payments to that employee, to begin at a fixed date and continue either through the employee's life or for a defined number of years. Since the employee purchases the annuity with after-tax dollars, the part of the payment received at distribution that represents a return of the annuity's cost is tax-free to the recipient; the part representing investment earnings is taxable to the recipient. In practice, the main difference between an annuity plan and a pension is in the funding method. Typically, an annuity will be funded by individual contracts, issued in the name of each participant.

While the annuity contract is generally purchased from an insurance company, an annuity may be issued by an individual or some other party. The following represent the most common types of annuities:

Fixed annuity - pays a fixed amount at regular intervals for a fixed term.Single-life annuity - pays a fixed amount at regular intervals for the life of one individual.Joint and survivor annuity - pays a fixed amount at regular intervals to one person for life, and, on his/her death, pays the same or different amount at the same or different intervals to a second individual for life.Variable annuity - pays a varying amount based upon the insurer's investment experience, cost-of-living indexes, or similar factors. Payments may be made for a fixed term or for the life of one or more persons.

It should be noted that when auditing certain tax-exempt organizations, the Internal Revenue Service has established that special tax deferred or tax sheltered annuity programs may be offered to their employees. Such would include public schools, hospitals, churches, and other exempt organizations; the plans are subject to section IRC 403(b).

Employees in such organizations are provided the opportunity to shelter their earnings by purchasing the annuity contract using pre-tax dollars. This increases their purchasing capacity in a similar fashion to the Flexible Benefits programs explained earlier. Unlike other programs, such as an individual retirement account (to be explained later), the individual participant, within the limits set by the IRS, can pay an amount that meets his/her personal financial needs; the limit, or exclusion allowance, is determined by a rating formula and is not a flat, annual maximum as in the case of an IRA.

The money deducted for the purchase of an annuity contract is considered payroll and should be included on your audit. The fact that the IRS does not tax the amounts contributed under the special 403(b) program is not relevant for exclusion. In either instance, the employee is simply electing to defer compensation using the purchase of the annuity contract.

Expense Reimbursements and Flat Expense

When an employee incurs expenses in connection with work, these expense amounts are usually reimbursed by the employer after the employee submits an itemized expense account. When these expense reimbursements are not available and verifiable during the audit, all such expenses paid to the employee should be included as payroll.

It is also common for certain employers, particularly those engaged in construction, to be subject toa union agreement requiring that their employees be paid flat expense allowances. Such allowances usually contemplate reimbursement of employees for travel expenses they incur traveling to and from different job sites each day or week. Often, the flat expense allowance is based upon the number of miles between the employer's place of business or the union headquarters and the distance to the job.

While these flat expense allowances are generally included with the wages paid to the individual employees, it is possible that these expenses may be deductible. The following interpretation from the Basic Manual is intended to clarify the treatment of reimbursed employee expenses and flat expense allowances as a basis of premium:

Reimbursed expenses and flat expense allowances, except for hand or power tools, paid to employees may be excluded from the audit only if all three of the following conditions are met:

1. The reimbursed expenses or expenses for which allowances were paid were incurred upon the business of the employer, and

2. The amount of each employee's expense payments or allowances is shown separately in the records of the employer, and

3. The amount of each expense reimbursement or allowance payment approximates a fair estimate of the actual expenses incurred by the employee in the conduct of his or her work.

Exception: When it can be verified that the employee was away from home overnight on the business of the employer, but the employer did not maintain verifiable receipts for incurred expenses, a reasonable expense allowance, limited to a maximum of $30 per day, is permitted. (Not applicable in Michigan, Minnesota, Montana and Nevada).

Tennessee provides that an insurer may include allowances of any type made to an employee only when allowances are in lieu of wages and are a specific part of the wage contract.


Commission Salespersons - Deductible Expenses

Expenses incurred in connection with

1. If itemized expense accounts are submitted regularly, preferably monthly.

2. If the insured maintains a separate and permanent record of the accounts.

3. If drivers or chauffeurs operate their own equipment (commercial, not pleasure) and accounts showing the operating expenses are submitted regularly, and a separate and permanent record of such accounts is maintained, the cost of repairs, licenses, insurance, etc., may be deducted if receipts for such costs are presented for review.

Note: The reason for deducting these costs is that commercial vehicles are used only in connection with business and not pleasure, therefore, any expenses which might be incurred are chargeable solely to the operation of the business. A passenger car with a combination license which is used for both business and pleasure should be treated as a passenger car and not as a commercial vehicle.

The following expenses are not deductible:

1. The repair, licenses, cost of insurance, etc., of a salesperson's personally owned automobile (passenger car).

Note: It is impossible to ascertain the proportion of these expenses chargeable to either business or personal activities.

2. If the account shows the expense in a lump sum, not being itemized.

3. If the account is not submitted regularly, preferably monthly.

Some insureds attempt to submit accounts showing expenses for several months or a full year which were prepared by the salesperson after expiration of the policy. Such accounts are not acceptable. Others who will not or cannot obtain accounts request that an arbitrary amount or a percentage of the salesperson's earnings be deducted to represent the expenses. This is not permissible.


Commercial (Advertisement) Filming Wages, Excluding Residuals

Often celebrities, such as sports personalities or entertainers, are employed for the filming of commercials. They will receive a session fee, which pays them for the days involved in filming the commercial. They may also receive additional payments (residuals) in the future, based on the number of times the commercial is actually broadcast.

The basis of premium should include only the session fee and not the residual payments, provided the records of the employer clearly identify such payments. In Nevada, residuals are included.


PAYROLL EXCLUSIONS

Excluded from payroll are the following items:

Tips

Tips and other gratuities received by employees are excluded. Two conditions are generally required when defining tips or gratuities, (1) the money or tip must be freely given, and (2) the tip amount must be controlled by the customer, not the employer. The essence of the tips exclusion is that these amounts are not paid or controlled by the employer. The tip must be controlled by the customer to be considered as excludable. The auditor should only include money actually paid or controlled by the employer. Florida, Delaware, Pennsylvania, and New Jersey have special rulings concerning tips. Nevada includes tips in the basis of premium.

Three concepts that have been addressed by the NCCI and many of the other independent bureaus need to be evaluated. The first involves those businesses that automatically incorporate a service or tip charge on a customer's bill. These charges appear most often in restaurants, hotels and clubs either as a flat catering amount or, in restaurants, as a percentage service charge for a party containing a minimum number of guests. As these tips and gratuities are not "freely given or controlled" by the customer, NCCI has ruled that these service charges are not considered excludable tips and should be included as payroll for premium purposes.

The second concept is generally found in private clubs. In this scenario, the club management solicits voluntary contributions from its members, usually at year end, for distribution to the employees. These contributions are disbursed to all employees. Though the contributions are given voluntarily, they are not disbursed by the members directly to the employee(s) providing the service. Instead, the contribution distribution is left to the discretion of the club management. The distribution is to all employees; it is not for the service employees only. In this scenario, the distribution should be included as payroll. Such a distribution is considered a bonus, not a tip or gratuity. California, as the exception, considers this distribution a tip.

The final situation involves those businesses that pay their employees on a dual basis such as in the catering industry. Union caterers by agreement have established a daily rate of pay for their waiters and other employees based upon a divided basis showing separate amounts for wages and tips. Since these payments are shown as collected from the customer in the caterer's billing, they qualify as tips and should be excluded from the employees' wages.

An Educational Bulletin on the subject Tips and Gratuities -Workers Compensation and General Liability," is available from PAAS. It provides clarification of the treatment of tips and gratuities for premium computation purposes.


Payments to Group

Contributory payments made by an employer in connection with group insurance or group pension programs are not to be included in the premium computation. Payments made by an employer of amounts otherwise required by law to be paid by employees to statutory insurance or pension plans such as the Federal Social Security Act are to be included, however.

There are a number of Federally-approved pension and savings plans available for employers. The type of programs outlined in this exclusion involve plans where the employee authorizes voluntary payroll deductions to be made from his/her paycheck. These deductions are commingled with deductions made by other employees to establish a diversified investment portfolio. Though the deductions are accumulated for the entire group, detailed records are maintained for each individual's contribution to the program. As an incentive for employees to participate, the employer will contribute amounts proportionate to those the employee specifies for voluntary deduction

Employer Contributions: The amount contributed to a Federally-approved pension and/or savings plan by the employer which is based upon an employee-referenced contribution (deduction) is not to be included in the payroll basis except when the employer is required to report these amounts as current taxable income to the employee.

Employee Contributions: Contributions, made in the form of a voluntary, employee-authorized salary reduction, which are diverted by an employee for payment, by the employer, into a pension or savings plan are includable as payroll for that employee.


Special Rewards

The Basic Manual excludes from payroll, "the value of special rewards for individual invention or discovery." These rewards are generally one-time payments for the invention or discovery of a new product, product line, or process which streamlines the company's procedures. To encourage employee participation, the reward's program is generally a part of the overall company benefit package. The amount awarded may be a flat, one-time payment or it may be a percentage of the overall benefit or savings to the company.

As an auditor, you should be aware that many companies record these payments as bonuses, not rewards. As with any other deduction from the premium base, such reward payments must be shown separately and should be verified by the auditor before the exclusion is allowed.


Dismissal Wages -Severance Pay

When an employee resigns, retires or is terminated, severance (dismissal) payments may be provided to the individual. Such payments should not be included in the payroll base nor in the premium computation. It has been reasoned that the severance policies of companies are subject to their own employment practices and the inclusion of such payments could prove inequitable to the premium base. Also, such payments are not considered earned by the employee and bear no relationship to exposure.

The payment of accumulated or accrued sick leave, or accumulated vacation pay, is considered pay to which the employee would have been entitled had they remained employed, and therefore, these amounts should be included. The essence of the exclusion relates to whether the entitlement is strictly caused by dismissal. If so, exclude. Again, the auditor must be able to discern the severance pay from the accumulated benefit. It is incumbent on the insured employer to maintain proper records.

The CaliforniaWorkers Compensation Manual provides that accumulated vacation and sick pay are an includable item except when this vacation and sick pay was accrued during a period when the employer was legally self-insured.

Nevada includes dismissal and severance pay in the basis of premium.


 Payments for Active Military Duty

The National Council has ruled that voluntary payments by business concerns to employees who have been selected for military service shall be considered pure gratuities and not subject to inclusion in the payroll reported for premium computation purposes. Such was the case when military reservists were called to active duty during World War II, the Korean War, the Persian Gulf War and the War in Iraq. During these conflicts, some employers made payments to their conscripted employees. The wage payments were often the difference between the military pay and the amount the employee normally would have received.

Also, employees of National Guard or reserve units of the United States military often may have to spend up to two weeks each year performing active military duty. Normal wages, paid by employers, to employees while serving on active duty are excluded from the basis of premium.

Nevada includes wages paid by employers to employees during periods of active military service.


Employee Discounts on Goods Purchased From the Employer

While more prevalent in mercantile businesses, this practice may be applied in other industries. When provided, the employer establishes a percentage discount for his/her employees on the purchase of items offered to the public. The employee pays the discounted price at the cash register; no money is exchanged in the form of wages or payroll. Due to the difficulty in establishing the figures, the bureaus have ruled that the measurement of such discounts makes it impractical to use as a premium base.

Employee discount programs should not be confused with incentive awards, awards offered by employers when employees perform in excess of their established goals. An incentive award may consist of a gift or store certificate which the employee(s) may use to purchase items of his/her own choosing. Similarly, the employer may select a catalog from an established company and award the employee(s) a dollar amount that can be used to order items in the catalog. Whether a prize, gift certificate, store certificate or catalog amount, each is considered a substitute for money and should be included as payroll.


 Expense Reimbursements to Employees Substantiated in the Employer's Records

Reimbursed expenses and flat allowances may be excluded from the premium base provided the records of the employer substantiate the payments. Please refer to the inclusions to payroll section, of this material for a renewed explanation of the difference between expenses that may be excluded and those that should be included.


 Supper Money

Employees who work late may be provided an actual reimbursement for supper or a flat amount set by the employer. In either case, this money does not represent an increase in exposure to loss for Workers Compensation; the increase in exposure to loss results from the additional time spent on the job by the employee. The exposure will be measured whether the employees are paid their regular rate of pay only or their regular rate plus overtime for the late work. With adequate records, the amount provided as supper money for this late work should not be included in the payroll base.


 Work Uniform Allowances

 A work uniform allowance represents an expense to the employer by requiring employees to wear a company uniform. It is a benefit to the employer, not the employee. A uniform allowance would be excluded from the premium base, the same as any other legitimate, substantiated, reimbursed expense.


 Third Party Sick Pay

Third party sick pay refers specifically to plans such as an insured's group insurance carrier which is paying income benefits to a disabled employee. In this case, the employee is not working, not exposed to Workers Compensation losses, and the sick pay is not being paid by the employer. These types of payments would be extremely difficult to identify in the insured's records, but if found, they should not be included as payroll.


 Company Perks

Although company perks are generally considered to be income for IRS purposes, the following should be excluded from payroll for Workers' Compensation premium purposes:

An employer-provided automobile or other road vehicle.An employer-provided free or discounted commercial airplane flight.An employer-provided incentive vacation.(e.g. Contest winner).An employer-provided discount on property or services.An employer-provided membership in a country club or other or other social club.An employer-provided ticket to an entertainment event.

OVERTIME

The presence of overtime pay earned by employees of an insured will have a direct impact upon audit procedures undertaken by the auditor. The existence of overtime pay can be discovered during the initial interview of the audit contact and later confirmed through examination of the insured's records. Sometime during the audit, the auditor must determine if the "overtime" meets the definition as stated in the Basic Manual Rule 2-C-1:

Overtime means those hours worked for which there is an increase in the rate of pay:

for work in any day or in any week in excess of the number of hours normally worked, orfor hours in excess of 8 hours in any day or 40 hours in any week, orfor work on Saturdays, Sundays or holidays.

In the case of a guaranteed wage agreement, overtime means only those hours worked in excess of the number specified in that agreement.

The Manual also now clarifies that forms of incentive pay commonly referred to as shift differential or premium pay associated with working other than normal day-shift hours during the standard workweek are not to be considered overtime. The note contained in Rule 2-C-1 is not applicable in Louisiana. Additional interpretations are noted in the "Other Overtime Comments" section of this material.

The auditor must first determine if the insured's books and records conform with the manual rule that allows for the exclusion of the excess portion of overtime wages. The Basic Manual requires the insured to show overtime pay separately by employee and in summary by classification. This requirement can be met either by the insured preparing a separate schedule or by summarizing overtime pay in the payroll records. Today, this can be done manually, or as a standard function within a computer payroll service.

The next step for the auditor is to determine what method the insured used to show the overtime pay. The records may provide just the premium portion of overtime pay or show the total overtime pay. Keep in mind that the intent is to exclude only the excess portion of overtime earnings. The following example will demonstrate two methods for calculating an employee's wages when overtime is involved.

Example: John Doe works in a manufacturing plant and receives an hourly rate of pay of $8.00. When John works in excess of the normal forty-hour week, he receives time and one-half, or $12.00 per hour. During the week, John worked 50 hours. The bookkeeper could calculate John's wages in either of the following ways:

Method 1

Method 2

50 hours @ $ 8.00

$ 400.00

40 hours @ $ 8.00

$ 320.00

10 hours @ $ 4.00

40.00

10 hours @ $12.00

120.00

Gross

$ 440.00

Gross

$ 440.00

While the gross wage for John is the same, the method of calculation differs substantially. Method 1 shows premium overtime pay; Method 2 reflects the gross overtime pay.

If overtime is paid at the rate of one-and-a-half times the regular rate, one-third of the overtime payment should be excluded. This deduction, in effect, adjusts the overtime wages back to regular wages. Likewise, if overtime is paid at double time, one-half of the overtime is deducted. In Method 2 above, the overtime is paid at time and one-half, therefore, the excludable portion is one-third of $120.00, or $40.00. The wage calculation in Method 1 reflects the premium overtime amount only; this $40.00 amount is the excludable amount. The chargeable amount for premium calculation purposes is $400.00 regardless of the method employed.

Care should be taken in reviewing the amounts included in the overtime column of the insured's records as this column is sometimes used for such items as jury duty pay, shift differential, vacation pay or holiday pay.

If the insured fails to properly maintain the records, explain the need to keep these records to allow for the premium overtime deduction and its favorable impact on the insured's premium. If, after explaining this procedure, the insured refuses to segregate the overtime pay, explain that those payments will be included in the premium determination. Also, indicate on the audit worksheet why the deduction was not allowed.

Additional information that may be shown on your worksheet as a guide for next year's audit: indicate the source records used to obtain the overtime pay and whether or not the schedule is prepared at premium pay or as overtime pay.


Other Overtime Comments

1. Premium overtime is not deducted in Delaware, Pennsylvania, or Nevada.

2. An exception to the overtime rule applies to payrolls assigned to any classification under the caption "Stevedoring" with a code number followed by the letter "F". Such overtime is not excludable. The stevedoring wage rate structure varies according to the type of cargo. A review of the applicable wage rates or cargo rates to determine the exclusion of extra pay for overtime would be both cumbersome and unrealistic. Accordingly, the overtime rules show the above exception.

3. So called premium pay is not subject to the overtime rule. Premium pay is pay of higher rates for night work, work under special conditions, or work at unusual hours. This premium pay is the normal rate for such work.

However, if employees work in excess of the normal period and receive a rate of pay over and above the premium pay rate, the rule does apply. (Refer to Rule 2-C-1 - Overtime, in the NCCI Basic Manual.)

4. Some employers pay their employees for extra time not worked, e.g., paid for eight hours when in fact only seven hours were worked. Such wages for time not worked are not deductible, as there was no overtime work involved, i.e., no wages above the normal rate for overtime actually worked.

5. When a payroll limitation applies, the premium overtime deduction is performed prior to the limitation calculation.


PAYROLL LIMITATION

Remuneration, or total payroll, has historically been the premium basis for Workers Compensation policies. In the 1920's an exception was made for the executive officers of corporations in the application of total payroll. This exception restricted the includable payroll amount to be applied for premium computation for the executive officers. It was reasoned that the executive officers were, in many instances, receiving disproportionately higher salaries which were not representative of the exposure to loss. As a result, a payroll range was instituted for executive officer wages for the purpose of premium determination.

Shortly after World War II, this same line of reasoning was applied to all employees and a payroll limitation, subject to a specific maximum average weekly amount, was established. Each employee's actual payroll, subject to this maximum average weekly amount, determined the basis for computing the policy premium. The resultant basis used in the premium computation became known as the limited payroll.

The initial maximum amount chosen in most jurisdictions was $100 per employee per week. Though this wage is very modest in contemporary times, when originally established, few employees earned in excess of this amount. As wages continued to increase, however, significant changes began to occur. By the mid 1960's, it was not unusual for most employees to earn in excess of $100 per week. The limited payroll concept placed part-time workers on an equal basis as regular employees. In essence, the limited payroll concept became nothing more than a head count, a basis that is not responsive to risk measurement.

Though increases were made in the maximum average weekly amount, these limits were quickly eroded by rising salary levels. As a result, the concept of using total payroll has been restored in all states except for executive officers and certain special classifications such as athletic teams. It must be noted that state exceptions may still exist. Many states have payroll limitation programs for certain types of construction operations. It is imperative that the auditor refer to the state manual pages for current limitation program guidelines.


How Payroll Limitation Applies

The premium for executive officers is subject to a minimum and a maximum payroll limitation as shown on the state rate pages and on the PAAS "Audit Information Summary Card" which was formerly known as the "Blue Card". (Note that the limitation amounts may be shown in the Miscellaneous Values section of some state rate pages.) These limitations are applied to the average weekly payroll of each executive officer determined on the basis of the total number of weeks employed during the audit period. A part of a week is considered as a full week in determining the average weekly payroll. (The auditor should refer to Rule 2-E. in the Basic Manual which covers situations when the executive officer's payroll is or is not to be included in the premium basis.) A simple example demonstrates the need to apply the limitation to the entire period employed.

Example:

An executive officer received a weekly salary of $400 per week for 52 weeks and also received a year-end bonus of $30,000, for total payroll of $50,800. Assume that the maximum weekly payroll limitation is $600 per week. How much should be included?

Include the maximum payroll amount of $31,200, based on $600 x 52 weeks. Even though the officer only earned an average of $400 per week, plus the $30,000 bonus, the actual average weekly wage of this officer is $976.92 because the bonus is considered as earned throughout the entire period of employment, not solely when it is paid. The maximum payroll amount of $31,200 would also be applied had this same executive officer been paid $50,800 in a lump-sum distribution.


Sole Proprietors and Partners

Most states allow partners and sole proprietors to be covered for Workers Compensation. When coverage is elected, the sole proprietor or partner(s) is generally subject to an annual fixed amount as shown in the Miscellaneous Values section of the state rate pages.

In certain states, an average minimum and maximum payroll has been established in lieu of a fixed amount. These average minimum and maximum amounts will be applied on the stated weekly, monthly or annual basis. Such is the case in Arizona, California, Delaware, Minnesota, Montana, New Jersey and New York. In Iowa, a sole proprietor or partner that elects coverage must select a weekly payroll amount that falls within the minimum and maximum established for executive officers.

In some of the states, either the Manual rules or the Workers Compensation Act specifically identify that the carrier may establish an assumed average wage for the electing party. In those states, the limitation is not a problem. When the rules or Act do not specifically state a procedure for establishing the electing individual's wage, the auditor must apply all reasonable means to verify the earnings of the individual involved.


Payroll Limitation - Other

Among other categories using limitations are Codes 9178 & 9179 -Athletic Team or Park, and Code 9186 - Carnival, Circus or Amusement Device Operator. When dealing with these classes (and other state special classifications), always refer to the Miscellaneous Values section of the state rate pages or the General Rules section of the state manual for the applicable limitation.


MISCELLANEOUS INTERPRETATIONS

There are many other premium basis scenarios that an auditor may encounter, some commonplace, others unique. Some of these scenarios, and the interpretations that were made, can be found in the NCCI Basic Manual and are provided here, and in several available PAAS Educational Bulletins.


Employees Retirement Income Securities Act of 1974

Under the Employees Retirement Income Securities Act of 1974, an employee may establish an individual retirement account. Contributions to this account are deductible from the employee's current year's income for the purpose of federal income tax. All payments made to individual retirement accounts (by the employee) in accordance with the provisions of the Employees Retirement Income Securities Act of 1974 shall be considered as payroll for Workers' Compensation premium computation purposes.


Stock Options

Often, CEO's and upper management employees are given stock options that allow them to buy company stock at a significantly lower price than the current market price of the company stock. Should the value of these options be added to payroll? How do you handle the increase in the stock price relative to the option price? Is the difference (Stock Price - Option Price) includable for premium computation purposes?

No. Only if the employee deferred part of their salary to pay for the options would an adjustment to payroll be necessary. The appreciation is never included. Stock options are an excludable perk.


Traveling Time Payments

Payments made to an employee to reimburse him or her for time spent in traveling to or from work, or to or from a specific job shall be considered as payroll and such payroll shall be assigned to the Manual classification which applies to the work normally performed by such employee.


Truckers - Paid on Mileage Basis

There has been petitioning on behalf of the trucking industry that when a trucker is compensated on a mileage basis, that a portion of the payment was for food and lodging and should not, therefore, be considered "payroll" for premium development purposes. The following decision was made by NCCI relative to this scenario:

When truckers are paid on the basis of 'cents per mile', with an allegation that a portion of the amount payable is to be considered as "expenses", the total amount paid to the employee should be audited for Workers' Compensation insurance premium purposes.


Wages For Time Not Worked

It is the practice of some insureds to pay employees wages for extra time not worked. An example of this is when an employee works seven hours, but is paid for eight. Though the insureds will contend that premium should not be taken on the payroll received for the hours not worked, no deduction shall be made, since no overtime work is involved.


Wages Paid For Idle Time, Strike Periods etc.

The entire amount of wages paid for idle time shall be included as payroll. The technique as to the appropriate classification to be applied when the employee is idle depends on the circumstances surrounding this idle time. The Basic Manual provides the following detail and appropriate classification techniques regarding this topic in Rule 1-F-1.

Some employers pay employees for time not worked. All wages paid to employees for such idle time must be included in payroll. These wages are assigned to the classification for work normally performed by the employee under the following circumstances:

Suspension or delay of work due to weather conditions,Delays while waiting for materials,Delays while waiting for another party to complete certain work,Delays arising from a breakdown of equipment,Stand-by time where employees are on the job but their services are not required on a continual basis, such as operators of crane, hoists or other equipment,Special union agreements or requirements that employees are paid for idle time under certain specific contractual arrangements, orInability of non-striking employees to perform normal duties due to other employees who are on strike. If non-striking employees perform absolutely no work for their employer and are not present at their employer's premises or job sites during a strike period, their payroll must be assigned to Code 8810 - Clerical Office Employees, provided adequate records are maintained by the employer.Any other causes of a similar nature.

Note that many of these conditions arise on construction or erection projects. The auditor must be aware of the definition of idle time and the Division of a Single Employee's Payroll rule when analyzing the assignment of wages under the various conditions.

For example, suppose an employee is roofing a building using sheet metal panels. During the day, a thunderstorm develops which makes it impossible to continue roofing. If the weather forecast calls for the storm to move out of the area in a relatively short time, the roofer may stay at the jobsite awaiting the rain to stop. This waiting period is idle time and the wages earned should be assigned to the roofing classification.

Conversely, the weather report may indicate that the storm will continue for the balance of the day. As such, the employer may require the employee to return to the insured's headquarters. At this location, the employer maintains a sheet metal shop for the production of various metal products such gutters, metal siding, air ducts, etc. Due to the weather conditions, this employee now spends four hours working in the shop. This is a change in duties and is subject to the Division of a Single Employee's Payroll rule. This is not idle time; the wages earned working in the shop should be assigned to the classification that describes the shop operation.

In some businesses, key employees are retained on the payroll even though no jobs exist. This is particularly true of superintendents, foremen and engineers in construction, erection or stevedoring operations. The wages earned by these key employees during periods when no work in progress should be assigned to the classification that describes the work actually performed, such as Contractors Permanent Yard, code 8227 or even Clerical Office, code 8810, if the employee works strictly in the office during the period of no work in progress . If the key employees are retained on the payroll and perform no duties during this time, their wages should be assigned to Code 8810.

Note, however, that the wages of a key employee who is subject to the classification, Contractor - Executive Supervisor, Code 5606, does not qualify for this payroll division to Code 8810. It is normally expected that an executive supervisor will spend a great deal of time in the office. They would, however, qualify for assignment to code 8227 if their duties involved the maintenance or storage of materials or equipment during the period of no work in progress, per the NCCI Scope for code 8227.

When wages are paid for idle time and the employees are engaged in work other than construction, erection or stevedoring, the wages should be assigned to the classification(s) that would normally apply to each employee's activity.

MISCELLANEOUS PREMIUM BASES

Workers Compensation premiums are based almost exclusively on the payroll earned by employees. There are, however, a few exceptions. The following premium bases emphasize these exceptions.


Aircraft Passenger Seat Surcharge

The operation of an aircraft by an insured for the transportation of its own personnel increases the exposure to loss for Workers Compensation insurance for that employer. Should it be determined that an insured is operating an aircraft, the policy may be endorsed to reflect this additional exposure.

The surcharge is applied per passenger seat, not on the total number of seats in the aircraft. Seats used by pilots, co-pilots or other crew members are not considered passenger seats for the calculation of the surcharge.

Subject to a maximum surcharge per aircraft, a per passenger seat surcharge should be applied in addition to the premium determined from the payroll of those employees classified to Code 7421 as pilots or as members of the flying crew. It should be noted, however, that Code 7421 does not have to appear on the policy for this surcharge to be made. If the classification applicable to the employee's non-flying duties carries a higher rate than the rate for Code 7421, the payroll of the employee should be assigned to the higher rated classification and Code 7421 would not be applicable to the policy. You may also have the situation were the executive officer, owner or partner of the business performs flying duties but has opted to be excluded from coverage or is not covered by state statute. In this scenario, code 7421 would not appear on the policy. In both of the above scenarios, the passenger seat surcharge should still be applied.

The surcharges are not cumulative in those instances where one aircraft is substituted for another aircraft during the policy period. The surcharges are cumulative, however, when more than one aircraft is owned or operated by the insured during the same policy period.

For example, suppose an employer with a calendar year policy is located in a state with a $100 per passenger seat surcharge and a maximum surcharge of $1000 per aircraft. This insured sells its four passenger seat aircraft on July 1 and purchases an eight passenger seat aircraft on July 10. Since only one aircraft is owned at any given time during the policy period and the seat surcharge is not cumulative, a charge of $800 should be made; the charge is for the larger of the two aircraft.

Suppose, however, that this same insured purchased the eight passenger seat aircraft on July 1 and sold the four passenger seat aircraft on July 10. The result is different because the insured owned two aircraft simultaneously. In this scenario the charge is $1,400 because the seat surcharge is cumulative when more than one aircraft is owned or operated by the insured during the same policy period. Note that the passenger seat surcharge


Farm Acreage

The Basic Manual defines a farm as, "Any parcel(s) of land used for the purpose of agriculture, horticulture, viticulture, dairying, or stock or poultry raising, as a business or commercial enterprise." The Manual also provides a number of commercial farm classifications that may be applied to such individual operations. These classifications do allow for an individual's payroll to be divided between the different farm operations, provided the insured maintains proper payroll records. When the records of the insured are not maintained to show this payroll segregation, the entire payroll for the farm must be divided on the basis of proportionate acreage. This rule is not applicable in Wisconsin. Refer to the Wisconsin exception pages for rules regarding farm operations. Idaho also allows for a division of payroll for employees engaged in raising of feed crops for animals provided separate and verifiable payroll records are maintained.


Per Capita Charges

Premiums for residential domestic workers, as defined by Rule 3-C of the Basic Manual, are charged per capita. Included in these classifications are butlers, chauffeurs, cooks, maids, gardeners, etc. The rates applicable for each code number that references one of the domestic classifications are per each employee qualifying for that classification rather than the usual rate per $100 of payroll.

For full-time domestic employees, the per capita charge may be pro rated to reflect an employment period of less than one year. The pro ration, however, should not be less than 25% of the full annual per capita charge. For part-time or occasional domestic workers, a single per capita charge applies for each aggregate of employed time which is one-half of the customary full time for such workers. An additional per capita charge applies to any remaining time.


Taxicab - Flat Annual Amount

The determination of verifiable payroll amounts for taxicab drivers is often a problem. This is due to the relationship of the drivers and the company and the additional considerations of tips and gratuities, multiple shifts, downtime, vacation time and other periods when the taxicabs are not in operation.

To determine the premium for a taxicab company, the entire payroll of all taxicab drivers must be included. When verifiable payroll records are not available, the premium charged will be determined using an amount per vehicle per policy year for employee operated vehicles. This per vehicle amount is found on the Miscellaneous Values page of the state rate pages. This per vehicle amount is subject to a pro rata adjustment only when a vehicle is owned by the insured for only a portion of the policy period.

An additional premium should also be calculated using this per vehicle per policy amount if the owner leases or rents the vehicles to others. Similarly, a pro rata adjustment would only be applied when the lease of the vehicle covers only a portion of the policy period.


Upset Payrolls

Though the premium determination for employers in the pulpwood, logging and lumbering industry is generally calculated using payroll, some states still maintain a system of rating using an upset payroll. An upset payroll is a basis of premium based on the number of cords of wood produced. In those states that retain this system, this base may be applied to Code 2702, Logging and Lumbering & Drivers, and to the state special classification for Georgia, Louisiana, Mississippi, North Carolina, Tennessee and Texas, Logging and Lumbering - Pulpwood Only & Drivers, Code 2705.

In those jurisdictions where the upset payroll system is retained, a dollar amount per cord is shown in the state rate pages and should be applied where the employer has failed to provide adequate payroll records. For example, the rate page for the State of Mississippi provides for Code 2702, "An upset payroll of $10.00 per cord shall be used for premium computation purposes only when verifiable payroll records are not available." Statistical information shows that a reasonable approximation of the actual payroll can be determined by utilizing this approach.

A question that often arises regarding the use of upset payrolls involves the includable payroll amount for sole proprietors and partners whose duties subject them to the Logging classification description and who, by law, have elected coverage. When such an election has been made and the individual(s) electing coverage is exposed to the logging hazard, the total cords of wood produced shall be multiplied by the upset payroll rate to determine the approximate payroll for the employer, period. You should not include the minimum, maximum or flat amount shown in the General Rules pages or in the State Miscellaneous Values page. The total cordage produced will reflect the exposure for all employees, including the electing owners, subject to the logging hazard.

Conversely, if our logger is a corporation and is located in a jurisdiction which allows executive officers to elect not to be covered for Workers' Compensation, no minimum, maximum or flat amount should be deducted from the calculated upset payroll for those officers that elect not to be covered. The total cords of wood produced multiplied by the rate per cord would determine the payroll basis for the logger. The upset payroll represents an approximation of payroll for those insureds who do not provide verifiable payroll records. A credit can be applied for each officer subject to the logging hazard if the insured will maintain proper payroll records; otherwise, include the total number of cords of wood produced.


Work Hours

A premium base is the unit that is used to measure the exposure to potential loss. In Workers Compensation insurance, the basic objective of the system is to describe the relationship between that exposure and the premium charged for the coverage.

Within the past few years, a number of representatives from various industries have proposed the use of work hours or man hours as a replacement to the current payroll basis. For the most part, these representatives are from higher paid, union-scaled industries. The rationale behind this trend is that one work hour, the exposure of one employee working for one hour at a particular operation, would best measure the exposure to the hazard of that operation regardless of an hourly wage of $10.00 or $25.00. They reason, and correctly so, that the use of work hours accurately reflects not only the size of the crew but also the length of time on the job. It must be remembered, however, that for a basis of premium to be acceptable, it must meet two basic, yet fundamental criteria. First, the basis of premium must measure risk, i.e. the premium base must reflect the exposure to the insured against hazard. Secondly, the basis of premium must be derived from a record that is always available and verifiable; the record must be subject to independent verification and not solely established for insurance purposes.

Work hours definitely meets the first criteria. As was previously stated, this basis accurately reflects both the size of the crew and the length of time that crew performs their work-related activities. The major objection to work hours as a premium basis is that it fails to meet both the availability and verifiability criteria as required. In many industry groups, those employers who maintain accurate work hour statistics are the exception and not the norm. Even where the employers are required to maintain such statistics, such as for federal programs, there is no reporting of the information for independent verification.


EMPLOYEES NOT RECEIVING WAGES

There are a number of situations where individuals work without receiving any payroll. Such non-salaried employments may include but are not limited by the following categories:

RelativesReligious Orders, ChurchesStudent NursesVolunteers

These individuals might still be covered by the Workers Compensation law or by a Voluntary Compensation endorsement. Remember, Part Five-Premium, Section C-Payroll of the standard Workers' Compensation policy provides, "This premium basis includes payroll and all other remuneration paid or payable during the policy period for the services of: 1. all your officers and employees engaged in work covered by this policy; and all other persons engaged in work that could make us liable under Part One (Workers' Compensation Insurance) of this policy." If coverage applies, there must be some means of determining a fair premium charge.


Relatives

The matter of determining the payroll of unsalaried (non-paid) relatives is a problem which arises from time to time. Whether to include an amount as payroll for such relatives would depend upon whether the state in which they are working considers them employees. (Employment status will not be reviewed in this material).

Once it has been determined that an unsalaried relative is considered an employee, it is then necessary to determine how much to include as payroll. A good rule of thumb would be to include as payroll for such unsalaried relatives an amount equal to that which would normally be received by a regular employee doing the same type of work.


Religious Orders, Churches, etc.

Nuns and missionary priests of religious orders normally would not be considered as employees of their Order and they should be excluded from the audit adjustment unless specific coverage is afforded by endorsement or claims have been accepted. When an endorsement is utilized, the premium basis should be specifically stated. When the policy is not endorsed, the auditor should note the existence of such individuals and notify underwriting.

In a case where a policy is issued to a church, hospital, school, etc., and nuns or missionary priests are assigned to one of these institutions from an Order, it is customary for the institution to pay directly to the Order an agreed upon amount for their services. Though no payroll is personally received by either the nuns or the priests, it is felt that the audit adjustment should include the amounts paid the Order plus the value of board and lodging if they are furnished by the institution being insured. The nuns and missionary priests are considered employees of the institution while they are assigned to it.

The situation surrounding clergy (pastors and curates) assigned to parishes and chaplain priests assigned to institutions is slightly different. They usually receive a nominal salary for their services in addition to their maintenance. The audit adjustment should include their salary plus the value of board and housing.


Student Nurses

Student nurses fall within a variety of compensation and training programs. In some hospitals student nurses receive only room and board during their training. In other hospitals, the student nurse pays for tuition and for room and board while attending a school of nursing. There are a few hospitals where a nominal amount is paid to the student nurse during the apprenticeship period. Regardless of the conditions of the training program, it is first necessary to determine whether or not the student nurse would be considered an employee in the state involved.

If the student nurse is considered an employee, the auditor should include the actual payroll received, if any, plus board and lodging. If no payroll is paid nor any board and lodging provided, the auditor should include an amount equal to the starting salary for a beginning trained nurse. If the student nurse receives only board and lodging, the auditor should include the value of this benefit plus an amount to equal the beginning salary for a trained nurse. State exceptions should always be applied.

If the student nurses are not considered employees, they may be included under the Act by means of the Voluntary Compensation endorsement. When this is done, Underwriting should also indicate what the basis of premium shall be. Lacking such a definition, the auditor should include for each student nurse the amount a beginning trained nurse would receive.


Volunteers

In a number of states, volunteer workers are entitled to benefits under the Workers Compensation laws. Unless the policy is endorsed to reflect the premium basis for such workers or a Manual rule or classification description provides guidance in the premium basis amount, such as for volunteer firemen, premium should be developed based upon the payroll amount normally received by employees doing the same or similar work.

A Voluntary Compensation endorsement may be used to bring volunteer workers under the Act. When such an endorsement is applied, the underwriter should provide the basis of premium to be applied for such covered individuals; this basis of premium should be specified on the endorsement.


GENERAL LIABILITY


INTRODUCTION

A basis of premium is the unit we use to measure our exposure to potential loss. To this basis insurance carriers apply a rate to the applicable number of units to determine the premium.

It must be recognized that all rules in ISO's General LiabilityManual are designed to be utilized with loss costs. For each employee or person using the program, each company must provide either its own rates or a procedure to convert the ISO loss costs to rates and/or premiums. All references and examples in this material assume company established rates. The basis of premium used for determining the premium charge for each classification is indicated in the classification section of the manual.

ISO's General Liability Manual Rule 24, Basis of Premium, provides several different premium bases, including: admissions, area, each, gross sales, payroll, total cost, total operating expenditures and units.


CLASSIFICATION STRUCTURE

The development of the premium for a Commercial General Liability policy first requires the selection of a classification that best describes the business operation of a risk. Please note that more than one classification assignment may be necessary for those risks with multiple business operations. Each classification description selected will apply to both the Premises/Operations and the Products/Completed Operations sublines. The same classification(s) must be used for both sublines.

The uniform exposure base concept provides that there is only one exposure base per classification, and that the exposure base will be the same for both the Premises/Operations and the Products/Completed Operations sublines. The major features of the classification structure for General Liability can be summarized as follows:

One classification table applies to both the Premises/Operations and Products/Completed Operations sublines.For a given risk, the same classification description applies to both sublines and each classification description selected has a unique classification code number.There is only one exposure base for each classification - the same for both sublines.

The exposure bases are provided in ISO's General Liability Manual for the major classification groupings as follows:

.Mercantile

Gross Sales

.Manufacturing/Processing

Gross Sales

.Contracting

Payroll or Total Cost

.Building/Premises

Area or Units

.Miscellaneous

Various

One final note. The classification structure and the uniform exposure base concept of General Liability provide that the same classification description, code number and exposure base should be applied for each operation of a risk and for both the Premises/Operations and Products/Completed Operations sublines. The uniform exposure base concept does not infer, however, that the developed exposure for each subline will be the same. In certain instances, the exposure developed for the Premises/Operations may be different from the exposure developed for the Products/Completed Operations subline such as in the case when "Exclusion - Intercompany Products Suits" endorsement is attached to a general liability policy.


ADMISSIONS (Rule 24.A)

This premium base is used primarily for theaters, shows and sporting event classifications. It is meant to measure "the total number of persons, other than working employees of the named insured, admitted to the event or events. This basis of premium will include all event attendees whether on paid admissions, tickets, complimentary tickets or passes."

It should be remembered that the admissions figure should include all persons (other than working employees) admitted. The price of the ticket is not relevant. Complimentary passes presented to the press and others should also be included. The insured should be informed of these items so that they can establish an appropriate record.

Important points to remember:

Non-working employees that attend an event, whether on a complimentary pass, free ticket or paid admission, should be counted, andGuidance is provided in the notes to "Theaters - drive-in" classification for determining the admissions number

AREA (Rule 24.B)

Area as a premium basis is restricted primarily to office risks and lessor's risks. While it is unusual to be asked to audit a risk based on area, it is not uncommon to audit a policy where a location, or locations, is based on area.

Area is calculated "by multiplying the product of the horizontal dimension of the outside of the outer building walls by the number of floors, including basements",


Area Included

 The definition of area in ISO's General Liability Manual is intended to include the following:Balconies, porches, steps, verandas, entranceways inside the outer building walls.Air shafts, elevator shafts, stairways, and the area of mezzanine floors (excluding the area of the mezzanine floor opening).Premises occupied by tenants and concessionaires.Vacant Premises.Basements - except as excluded below.Stockrooms and other areas inaccessible to insured's clients.

Area Excluded

Courts and mezzanine types of floor openings.Portions of basements or floors on which 50% or more of the area is used for shop or storage in connection with building maintenance, dwelling by building maintenance employees, heating units, power plants, or air conditioning equipment.

It is important to remember that this applies only to floors where 50% or more of the area is used for such maintenance activities and then only that portion is excludable. For example, if 40% of one floor of a multi-storied building is used to house an air conditioning unit, the entire area of that floor must be included in the exposure development since it did not meet the 50% limitation. If the air conditioning unit takes up 70% of the area of that one floor, however, the auditor would exclude 70% of the total area of that floor. The remaining 30% portion of that floor, not used to house the air conditioning unit, should be included in the area exposure development.

EACH (Rule 24.C)

Each as a basis of premium involves units of exposure. The quantity comprising each unit of exposure is indicated in the classification notes.

Examples: Classification

Code Number

Premium Base

Animals-saddle-private

40047

Each animal

Animals-draft

40045

Per team

Athletic Program-amateur

40066

Per game

Camps-for-profit

41421

Camper days

Sewers

48039

Per mile

Schools - trade or vocational

47474

Per student


GROSS SALES (Rule 24.D)

ISO's General Liability Manual defines gross sales as:

The gross amount charged by the named insured, concessionaires of the named insured or by others trading under the insured's name for:

All goods or products, sold or distributed,Operations performed during the policy period,Rentals (product rentals, not real property), andDues or fees.

A sale is completed when the parties involved agree to the terms of the transaction. The sale could be consummated as a point-of-purchase sale, such as a counter sale in a store, or through a sales agreement such as would be found in a manufacturing firm. It is important to point out here that the basis of premium is gross sales - not taxable sales or net sales. The gross sales of an insured provides the starting point and then the following gross sales inclusions and exclusions should be applied:

Gross Sales Inclusions

Certain items do not represent a change in the liability exposure resulting from the sale of merchandise and therefore are included in the gross sales premium base. These individual items, as described in Rule 24.D.2 of ISO's General Liability Manual, are discussed here in detail.

The following items shall not be deducted from gross sales:

1. Foreign Exchange Discounts

If the exchange rate changes between the time a sale is contracted and the time actual payment aremade, a foreign exchange gain or loss will result. This gain or loss does not affect the auditable gross sales. A sale is consummated at the time the parties agree on the terms. For example, if goods are sold for 100,000 pesos when the rate of exchange is 10 pesos to the dollar, the journal entry in dollars would be:

 Accounts receivable

$10,000

Sales

$10,000

Only $8,333 can be realized from the 100,000 pesos paid by the foreign entity, the difference being the loss due to the exchange rate. Recognizing that this transaction will certainly affect the insured's net income, it does not alter the potential liability of our insured reflected in the gross sale of $10,000.

2. Freight Allowance to Customers

A freight allowance is a discount or allowance deducted from the price of a product if the customers themselves pick up the product or arrange for its delivery. Since a freight allowance represents a marketing technique designed to increase sales volume, no deduction is allowed for the discount.

For example if a furniture store sells a customer $3,000 in furniture and, since the customer will pick up the furniture, they take $150 off the price. The full $3,000 is the gross sale which should be included in gross sales.

3. Total Sales of Consigned Goods and Warehouse Receipts

In a consignment agreement, a dealer or distributor receives a shipment of merchandise, pays only for what they sell and returns the unsold goods to the consignor. Though the sold merchandise did not actually belong to the insured, the total amount of goods sold must still be included in the auditable gross sales.

The gross sales of merchandise sold by consignment auction barns or consignment shops are included in the basis of premium. Many of these stores want the auditor only to include their commission in gross sales, but the customer bought the item in their store, the entire sales price is included.

Warehouse receipts reflect charges for the storage of goods sold but not yet received by the customer. These charges should be included in the auditable gross sales as they reflect an additional liability of maintaining goods not owned by the insured.

4. Trade or Cash Discounts

Cash discount programs generally allow a percentage deduction from the regular or list price of a product when the purchaser pays in cash or before a specified date. Sellers provide cash discounts to collect accounts receivable more quickly and to improve their cash flow. An insured offering such a program may invoice his customer using terms of 2/10-net/30. If the purchaser pays within 10 days, the gross invoice amount may be reduced by 2%. Otherwise, the gross invoice amount is due and payable within 30 days. Since the discount for prompt payment does not represent a reduction in liability arising from the sale of the product, no deduction should be made.

A trade discount is a deduction from the regular or list price of a product. It is most often allowed by a manufacturer or a wholesaler to a retailer or from one manufacturer to another. The deduction is generally a result of continued patronage by the customer or due to the large quantity being purchased. This latter trade discount is often referred to as a quantity discount. If an insured's records show separately this trade discount, no reduction in the auditable gross sales figure should be applied. The liability exposure is not reduced as a result of this business practice.

5. Bad Debts

The unpaid balance on merchandise bought from an insured should not be excluded from gross sales. The liability exposure for a product exists once the insured has relinquished possession, regardless of the insured's ability to collect the money. The product is still out in the marketplace so there is full liability exposure even though the customer did not complete the payments.

6. Repossession of Items Sold on Installment (Amount Actually Collected)

The repossession of a product limits the liability exposure of a seller to the time period when possession had been relinquished. Once repossessed, only the amount of money actually collected on the sale of the product should be included in the gross sales. Even if monies are collected years after the product has been repossessed, they will be included as gross sales. Additionally, if a repossessed product is resold, the sales price of the repossessed product will be included in gross sales.

An example will clarify. Our insured sells a $2,500 computer with terms of $500 down and the balance at the rate of $100 for twenty months. After three months the purchaser stops making payments, so in the fifth month, the computer is repossessed. The auditable gross sales are $800, the $500 down payment and three monthly payments of $100. If the insured resells the repossessed computer as a used computer for $1,500, the $1,500 will also be included in gross sales. If the insured collects $100 from the customer two years later, this revenue will be included in gross sales when collected.

Gross Sales Exclusions

Rule 24.D.3 of ISO's General Liability Manual provides that certain items may be excluded from the gross sales premium base. Each of these items is addressed here.

The following items shall be deducted or excluded from gross sales:

1. Sales or Excise Taxes Which Are Collected and Submitted to a Governmental Division

Taxes which are imposed on the purchaser and collected and remitted directly to a governmental agency by the seller may be excluded. In allowing this adjustment, the liability exposure associated with the sold product is not diminished. The seller merely acts as the revenue collection unit for the governmental agency. The records of the seller must show separately the taxes collected and a governmental payable account.

Dealers of liquor, tobacco and similar products which incorporate state or federal taxes within their prices should not automatically have these taxes deducted from their audited gross sales. Only sales and excise taxes that are directly remitted to a governmental agency by the insured will be deducted from gross sales.

2. Credits for Repossessed Merchandise and Products Returned. Allowances for Damaged and Spoiled Goods

When a purchaser returns a product as being unwanted, defective or damaged, the seller will generally allow a sales credit. The sales credit may be excluded from the auditable gross sales if the records are maintained to show separately this adjustment. When an allowance is granted for spoiled or damaged products that are not returned, this allowance may also be excluded from gross sales with proper documentation. In either situation, not only is the sales revenue reduced but also the potential liability as the product is off the market. The return of the product or the agreement that it is damaged in effect cancels the seller's warranty. A reduction in liability also takes place when the seller repossesses a product. Therefore, a sales credit to remove the unpaid balance from a seller's books for a product that has been repossessed may be excluded. However, if any of these products are resold, that sale is included in gross sales.

3. Finance Charges for Items Sold on Installments

Finance charges reflect the value of money and its use over time in purchasing items on installment. Since a sale is transacted when the buyer and seller agree to terms, the finance charges are not a part of the product sale and may be excluded from gross sales when properly shown in the insured's records. If the finance charge is built into the price of the product and not shown separately, no deduction is allowed.

4. Freight Charges on Sales if Freight is Charged as a Separate Item on Customer's Invoice

A freight charge is a separate charge made to a customer for the delivery of a  product. Please note that no distinction is made between a freight charge via common carrier or the insured seller's own means of delivery. If the freight charges are shown as a separate item on the customers' invoices, they may be excluded from the auditable gross sales. The insured's liability exposure is the same whether the product is picked up by the customer or it is delivered.

Shipping and handling charges are also separate charges incurred by the purchaser. Whether a percentage charge on the total purchase or a flat dollar amount, shipping and handling generally refers to the expenses incurred by the seller for locating, sorting, packing and shipping a customer's order. As these charges are applied to offset normal expenses incurred in business, and do not reflect only the actual freight charges incurred, they should not be deducted from gross sales.

5. Royalty Income From Patent Rights or Copyrights Which Are Not Product Sales

Money received as royalties from patents or copyrights does not represent the sale of a physical product that could cause a loss and, therefore, may be excluded from gross sales. However, if a risk receives royalties related to a product that they are selling, this income is included.

6. Rental Receipts for Products Liability Coverage Only

Income from renting products will be excluded from gross sales, but for products liability only. This exclusion has no effect on premises liability; the rental income is included in gross sales for the premises subline. For example, some supermarkets rent steam cleaners for carpets. The rental income from the steam cleaner rental will be included in gross sales for the premises subline of the supermarket classification.


Certain items do not represent a change in the liability exposure resulting from the sale of merchandise and therefore are included in the gross sales premium base. These individual items, as described in Rule 24.D.2 of ISO's General Liability Manual, are discussed here in detail.

The following items shall not be deducted from gross sales:

1. Foreign Exchange Discounts

If the exchange rate changes between the time a sale is contracted and the time actual payment aremade, a foreign exchange gain or loss will result. This gain or loss does not affect the auditable gross sales. A sale is consummated at the time the parties agree on the terms. For example, if goods are sold for 100,000 pesos when the rate of exchange is 10 pesos to the dollar, the journal entry in dollars would be:

 Accounts receivable

$10,000

Sales

$10,000

If the foreign entity pays the invoice when the exchange rate is 12:1, the journal entry in dollars would be:

Cash

$8,333

Foreign exchange loss

1,667

Accounts receivable

$10,000

Only $8,333 can be realized from the 100,000 pesos paid by the foreign entity, the difference being the loss due to the exchange rate. Recognizing that this transaction will certainly affect the insured's net income, it does not alter the potential liability of our insured reflected in the gross sale of $10,000.

2. Freight Allowance to Customers

A freight allowance is a discount or allowance deducted from the price of a product if the customers themselves pick up the product or arrange for its delivery. Since a freight allowance represents a marketing technique designed to increase sales volume, no deduction is allowed for the discount.

For example if a furniture store sells a customer $3,000 in furniture and, since the customer will pick up the furniture, they take $150 off the price. The full $3,000 is the gross sale which should be included in gross sales.

3. Total Sales of Consigned Goods and Warehouse Receipts

In a consignment agreement, a dealer or distributor receives a shipment of merchandise, pays only for what they sell and returns the unsold goods to the consignor. Though the sold merchandise did not actually belong to the insured, the total amount of goods sold must still be included in the auditable gross sales.

The gross sales of merchandise sold by consignment auction barns or consignment shops are included in the basis of premium. Many of these stores want the auditor only to include their commission in gross sales, but the customer bought the item in their store, the entire sales price is included.

Warehouse receipts reflect charges for the storage of goods sold but not yet received by the customer. These charges should be included in the auditable gross sales as they reflect an additional liability of maintaining goods not owned by the insured.

4. Trade or Cash Discounts

Cash discount programs generally allow a percentage deduction from the regular or list price of a product when the purchaser pays in cash or before a specified date. Sellers provide cash discounts to collect accounts receivable more quickly and to improve their cash flow. An insured offering such a program may invoice his customer using terms of 2/10-net/30. If the purchaser pays within 10 days, the gross invoice amount may be reduced by 2%. Otherwise, the gross invoice amount is due and payable within 30 days. Since the discount for prompt payment does not represent a reduction in liability arising from the sale of the product, no deduction should be made.

A trade discount is a deduction from the regular or list price of a product. It is most often allowed by a manufacturer or a wholesaler to a retailer or from one manufacturer to another. The deduction is generally a result of continued patronage by the customer or due to the large quantity being purchased. This latter trade discount is often referred to as a quantity discount. If an insured's records show separately this trade discount, no reduction in the auditable gross sales figure should be applied. The liability exposure is not reduced as a result of this business practice.

5. Bad Debts

The unpaid balance on merchandise bought from an insured should not be excluded from gross sales. The liability exposure for a product exists once the insured has relinquished possession, regardless of the insured's ability to collect the money. The product is still out in the marketplace so there is full liability exposure even though the customer did not complete the payments.

6. Repossession of Items Sold on Installment (Amount Actually Collected)

The repossession of a product limits the liability exposure of a seller to the time period when possession had been relinquished. Once repossessed, only the amount of money actually collected on the sale of the product should be included in the gross sales. Even if monies are collected years after the product has been repossessed, they will be included as gross sales. Additionally, if a repossessed product is resold, the sales price of the repossessed product will be included in gross sales.

An example will clarify. Our insured sells a $2,500 computer with terms of $500 down and the balance at the rate of $100 for twenty months. After three months the purchaser stops making payments, so in the fifth month, the computer is repossessed. The auditable gross sales are $800, the $500 down payment and three monthly payments of $100. If the insured resells the repossessed computer as a used computer for $1,500, the $1,500 will also be included in gross sales. If the insured collects $100 from the customer two years later, this revenue will be included in gross sales when collected.


Gross Sales Exclusions

Rule 24.D.3 of ISO's General Liability Manual provides that certain items may be excluded from the gross sales premium base. Each of these items is addressed here.

The following items shall be deducted or excluded from gross sales:

1. Sales or Excise Taxes Which Are Collected and Submitted to a Governmental Division

Taxes which are imposed on the purchaser and collected and remitted directly to a governmental agency by the seller may be excluded. In allowing this adjustment, the liability exposure associated with the sold product is not diminished. The seller merely acts as the revenue collection unit for the governmental agency. The records of the seller must show separately the taxes collected and a governmental payable account.

Dealers of liquor, tobacco and similar products which incorporate state or federal taxes within their prices should not automatically have these taxes deducted from their audited gross sales. Only sales and excise taxes that are directly remitted to a governmental agency by the insured will be deducted from gross sales.

2. Credits for Repossessed Merchandise and Products Returned. Allowances for Damaged and Spoiled Goods

When a purchaser returns a product as being unwanted, defective or damaged, the seller will generally allow a sales credit. The sales credit may be excluded from the auditable gross sales if the records are maintained to show separately this adjustment. When an allowance is granted for spoiled or damaged products that are not returned, this allowance may also be excluded from gross sales with proper documentation. In either situation, not only is the sales revenue reduced but also the potential liability as the product is off the market. The return of the product or the agreement that it is damaged in effect cancels the seller's warranty. A reduction in liability also takes place when the seller repossesses a product. Therefore, a sales credit to remove the unpaid balance from a seller's books for a product that has been repossessed may be excluded. However, if any of these products are resold, that sale is included in gross sales.

3. Finance Charges for Items Sold on Installments

Finance charges reflect the value of money and its use over time in purchasing items on installment. Since a sale is transacted when the buyer and seller agree to terms, the finance charges are not a part of the product sale and may be excluded from gross sales when properly shown in the insured's records. If the finance charge is built into the price of the product and not shown separately, no deduction is allowed.

4. Freight Charges on Sales if Freight is Charged as a Separate Item on Customer's Invoice

A freight charge is a separate charge made to a customer for the delivery of a product. Please note that no distinction is made between a freight charge via common carrier or the insured seller's own means of delivery. If the freight charges are shown as a separate item on the customers' invoices, they may be excluded from the auditable gross sales. The insured's liability exposure is the same whether the product is picked up by the customer or it is delivered.

Shipping and handling charges are also separate charges incurred by the purchaser. Whether a percentage charge on the total purchase or a flat dollar amount, shipping and handling generally refers to the expenses incurred by the seller for locating, sorting, packing and shipping a customer's order. As these charges are applied to offset normal expenses incurred in business, and do not reflect only the actual freight charges incurred, they should not be deducted from gross sales.

5. Royalty Income From Patent Rights or Copyrights Which Are Not Product Sales

Money received as royalties from patents or copyrights does not represent the sale of a physical product that could cause a loss and, therefore, may be excluded from gross sales. However, if a risk receives royalties related to a product that they are selling, this income is included.

6. Rental Receipts for Products Liability Coverage Only

Income from renting products will be excluded from gross sales, but for products liability only. This exclusion has no effect on premises liability; the rental income is included in gross sales for the premises subline. For example, some supermarkets rent steam cleaners for carpets. The rental income from the steam cleaner rental will be included in gross sales for the premises subline but excluded for the products subline of the supermarket classification.


MISCELLANEOUS SALES INTERPRETATIONS


Treatment of Foreign Sales

The inclusion or exclusion of foreign sales is an often raised question by auditors. There are actually two different types of operations which must be addressed separately: (1) import and (2) export. However, before we look at these operations, it is important to understand the extent of coverage provided by the Commercial General Liability policy.

Section V.4 of the policy provides coverage worldwide for products, defining "Coverage Territory"

as:

a. "The United States of America (including its territories and possessions), Puerto Rico and Canada;

b. International waters or airspace, provided the injury or damage does not occur in the course of travel or transportation to or from any place not included in a. above; or

c. All parts of the world if:

(1) The injury or damage arises out of:

(a) Goods or products made or sold by you in the territory described in a. above; or

(b) The activities of a person whose home is in the territory described in a. above, but is away for a short time on your business; and

(2) The insured's responsibility to pay damages is determined in a "suit" on the merits, in the territory described in a. above or in a settlement we agree to."

Using this definition as it relates to export operations, the sale of products outside the U.S. should be included in the gross sales and classified under the appropriate classification as though it were sold in the U.S. While no deduction is made for foreign sales, it would still be a good idea to show these separately in the details of the audit and to notify the underwriting department.

A named insured who imports goods manufactured outside the U.S. is subject to claims on those products that they sell. The monies collected for the sale of these foreign-produced goods should be included in the gross sales for premium development and assigned to "Importers," code 55410. Again, it is suggested that underwriting be notified of foreign exposure being developed and should be provided with full details on the extent and nature of the operations.


Inter-company Sales

Rule 27.B.2.a. of ISO's General LiabilityManual provides the following additional information as it relates to the development of gross sales for manufacturing and processing risks:

Include all sales of goods or products from one company to another including those sales from one named insured to another.

Therefore, the premium charge should be based on all sales generated by each named insured, including inter-company transactions. This procedure is supported by the following example:

ABC, Inc. and XYZ, Inc. are both named insureds on the same policy. ABC, Inc. manufactures metal pipes which are sold to others ($1,000,000) and to XYZ, Inc. ($200,000). XYZ, Inc. manufactures and sells plumbing fixtures. Their gross sales were $3,700,000.

The summary for this risk would be as follows:

 CodePrem/Ops

Products

ABC, Inc.

58009

$ 1,200,000

$ 1,200,000*

XYZ, Inc.

58095

3,700,000

$ 3,700,000

*Notice that the $200,000 sales to XYZ, Inc. were excluded from Products coverage only by the attachment of the endorsement. Premises coverage exposure was not affected.


Wholesale Value Concept

The wholesale value concept comes into play when a manufacturing risk also operates a retail store selling their manufactured products, all under one legal entity. The reason for this is that the manufacturing classifications contemplate the wholesale sale of the manufactured products; however, they do not contemplate the added exposure of operating a retail store. There are two rules in ISO's General Liability Manual that support this concept:

Rule 27.A.3 - This rules states that if a manufacturing risk sells their products through their own retail operations, the retail operations will be separately classified from the manufacturing operations.

Rule 27.B.2.c - This rule states that the wholesale value of goods that a manufacturing risk transfers to their retail operations will be included as gross sales in the manufacturing classification.

Rule 27.B.2.c is the rule that affects the calculation of the basis of premium for these risks. If a manufacturing risk operates their own retail store, the gross sales of the manufactured product will be assigned to the retail store classification while the wholesale value will be included in gross sales assigned to the manufacturing classification. This way, the carrier will be receiving a separate premium for both the manufacturing operations and the retail store operations. Rule 27.A.3 states that the manufacturing classifications do not contemplate retail store operations.

For example, this insured is a shoe manufacturing risk, properly assigned to "Shoe, Boot or Slipper Mfg," code 59005. They also operate a retail outlet store selling outdated stock, over runs, and slightly damaged shoes which is assigned to "Shoe Stores," code 18110. The sales developed by the auditor are as follows:

Shoe Sales (sold to other retailers) $2,000,000 ($20 per pair)

Shoe Sales (company outlet store) $500,000 ($50 per pair)

The $2,000,000 in wholesale sales to retailers will be included in the basis of premium for code 59005 and the $500,000 in retail sales will be assigned to code 18110. If this is all the auditor did, the carrier will not be receiving any premium for the manufacturing exposure for the 10,000 shoes sold by the retail outlet ($500,000/$50). Therefore, the since wholesale value of the shoes is $20 per pair, so multiplying the $20 by 10,000 the wholesale value of these shoes are $200,000. The basis of premium for code 59005 should be $2,200,000, which reflects the total manufacturing exposure of this company.


PAYROLL (Rule 24.E)

Payroll is used as the basis of premium for contracting and servicing classifications. In addition, there are some classifications in the miscellaneous business group that also use payroll as the rating base.

Payroll is defined by ISO's General LiabilityManual Rule 24.E as, "Payroll means remuneration" and "Remuneration means money or substitutes for money." The definition is further detailed through the use of the following inclusions and exclusions.


Payroll Inclusions

Payroll includes the following items:

Commissions

Commissions are mainly associated with outside salespersons and the payroll of outside salespersons is excluded for general liability. However, some classifications include outside salespersons in the notes so the payroll and commissions of these salespersons will be included in the basis of premium. Additionally, some employees that do not qualify as outside salespersons may receive commissions. For example, the foreperson of a HVAC installation contractor may try and sell upgrades during installation. If successful, the employee will receive a commission from the sale. These commissions are included in the applicable HVAC contracting classification.

Bonuses

Employees receive bonuses for a wide variety of reasons including, but not limited to an employee's work performance, years with the company, special accomplishments, holidays, and the overall company's financial results. All bonuses are included in payroll.

Extra Pay for Overtime Work (except as provided in Rule 24.E.4)

Over time pay is both included in and excluded from payroll. Included in payroll is the straight time portion of overtime pay and excluded is the premium portion. Because of the complexities and special guidelines that pertain to overtime, this item is reviewed after the payroll inclusions and exclusions section.

Pay for Holidays, Vacations or Periods of Sickness

All forms of holiday, vacation and sick pay are included in payroll even though the employees are not physically working during these hours. These benefits are earned by the employees while they are working and are considered part of their payroll. If employees are reimbursed for unused holiday, vacation and sick days, this amount will be included as payroll. This payroll will be included in the classification assigned to the employee's duties. If an employee's payroll is assigned to multiple classifications during the policy period, and the insured has kept the holiday, vacation and sick pay separate - the holiday, vacation and sick pay will be assigned to the classification that developed the most payroll for each employee.

Employer Payments to Statutory Insurance or Pension Plans - Required by Law to be Paid by Employees

Payments made by the employer of amounts that would have been legally withheld from employees' pay to meet statutory obligations should be included in the employee's payroll. Such payments include, but are not limited to Social Security, FICA, SUTA, and payments to pension plans. When the employer makes the payments for which employees are liable for, they should be added back to payroll. However, the portions which are the legal responsibility of the employer are excluded from payroll.

Payments to Employees on Any Basis Other than Time Worked

Examples of these types of payroll include, but are not limited to piecework, profit sharing, incentive plans, and upset payroll. Some assembly companies will pay their shop employees based on the units completed, rather than hours worked. These payments will be included in payroll, even if the employee works from home. Upset payroll is used in the logging industry when loggers are paid by the number of cords of wood produced - this will also be included as payroll.

Payment or Allowance for Hand or Power Tools Provided by Employees

Most common in the construction industry, some contractors will reimburse employees for using their own tools in the course of their employment. These reimbursements will be included is payroll.

Rental Value of an Apartment or House Provided by the Employer

Some employers will, as a part of the employment agreement, provide a free or reduced rent apartment or house to select employees. When this situation is encountered and the classification assigned to the insured's business is rated on payroll, the value of the free or reduced rent is included in payroll.

Value of Lodging Other than an Apartment or House (to the extent shown in the insured's records)

Lodging constitutes temporary shelter while on assignment for an employer; whereas housing represents the permanent abode of the employee that is used as the "headquarters" from which the employee works. When the employer is required to provide lodging as part of the terms of employment, the value of the lodging, to the extent disclosed in the insured's records, shall be included with the actual wages as payroll. However, if an employee is reimbursed for lodging expenses while traveling on business of their employer, such reimbursements are not included as payroll. These are expense reimbursements.

Value of Meals (to the extent shown in the insured's records)

When the employer is required to provide meals as part of the terms of employment, the value of the meals, to the extent disclosed in the insured's records, shall be included with the actual wages as payroll. However, if an employee is reimbursed for the amounts spent on meals while traveling for their employer, such reimbursements are not included as payroll. These are expense reimbursements

Value of Store Certificates, Merchandise, Credits or any other Substitutes for Money

When an insured provides any of these type benefits, in lieu of or as part of their employees' wages, the value of the benefits would be included in the payroll base for premium development. Some employers may adopt such programs at Christmas or fiscal year end instead of a monetary bonus. In any cases, these plans would be treated the same as a monetary bonus and included in payroll. This does not include employee discounts for purchasing items from the employer. For example, if an retail store risk allows their employees a 30% discount on items the employees purchase in the store, this amount is not included in payroll.

Payroll of Mobile Equipment Operators and Their Helpers

Insured's EmployeesThe payroll of mobile equipment operators, regardless of whether such operators are designated or licensed to operate automobiles, is included. For example, if a metal erection contractor employs a crane operator, the payroll of the crane operator will be included in the appropriate "Metal Erection… classification assigned to the insured's business.Equipment Rented from OthersMobile Equipment with Operators. If mobile equipment is hired by the insured with operators, the payroll of the operator is included and assigned to the appropriate construction classification assigned to the insured's business. If the actual payroll records cannot be obtained, then 1/3 of the total amount paid for the hire of the mobile equipment is used as wages. Even if the insured has a certificate of insurance from the mobile equipment rental business, the payroll of the operator is included in payroll as the insured has direction and control over the conduct of the equipment and operator. Mobile Equipment without Operators. When the insured hires mobile equipment without operators; the premium is based on the payroll of the insured's employees operating the mobile equipment. This payroll will be assigned to the classification assigned to the insured's operations.

Payroll of Executive Officers and Individual Insureds and Co-Partners

Rule 24.E.2.m provides for a flat amount (or in some states a minimum and maximum) which should be included in payroll for executive officers, sole proprietors and co-partners. The auditor should refer to the state rate or exception pages of ISO's General Liability Manual for these amounts. Additional sources of this information can be found in the Rating Information section of PAASbase™ and in the PAAS® Audit Information Summary Card.

The payroll of these individuals is to be assigned to the appropriate classification(s), the same as for any other employee. If, however, they are engaged principally in clerical operations or as salespersons they are excluded for premium computation purposes.

Part-time or seasonal business may have the payroll amounts for officers, proprietors and co-partners reduced, if the business operations cease for an extended period of time. The amount included for these individuals, whether flat amount or payroll subject to minimum and maximum, may be reduced by 2% for each full calendar week in excess of twelve during which the risk performs no operations. For example, a paving contractor is shut down for 20 weeks during the winter months. If one of the executive officers supervises the paving crew and is included at the flat amount of $52,000; the auditor may reduce this amount by 16% (20 - 12 = 8 - 8 x 2% = 16%) or $8,320. This executive officer will be included at $43,680.

Payroll of Leased WorkersThe liability exposure of workers leased from an employee leasing firm is covered by the insured's policy. The reason for this is these employees are working under the direction and control of the insured, not the employee leasing company. The leased workers are classified as if they are direct employees of the insured. If the auditor has access to the individual payroll records, they should be used. If not, the total amounts paid to the employee leasing company will be included as payroll.

Fees Paid to Employment Agencies The liability exposures created by temporary personnel working on behalf of the insured would be covered by the insured's policy as these employees are working under the direction and control of the insured. The temporary employees are classified as if they were direct employees of the insured. The auditor should include the entire fees paid to the employment agency not just the wages paid to the temporary employees.


Payroll Exclusions

According to ISO's General Liability Manual, payroll does not include the following for premium computation purposes:

Tips and Other Gratuities

Tips and other gratuities received by employees are excluded. Two conditions must be met when defining tips or gratuities, (1) the money or tip must be "freely given, and (2) the tip amount must be controlled by the customer, not the employer. The essence of the tips exclusion is that these amounts are not paid or controlled by the employer.

Tips are normally associated with restaurant operations and restaurants are rated on gross sales - not payroll. However, some restaurants will request that service charges to be excluded from gross sales. Service charges, such as an 18% tip will be added to all parties of 8 or more, do not qualify as tips as they are not controlled by the customer. Additionally, the tips exclusion only applies to payroll, there is no tips exclusion to gross sales.

Payments to Group Insurance or Pension Plans for Employees

Contributory payments made by an employer in connection with group insurance or group pension programs are not to be included in the premium computation. However, if an employer makes payments to these plans that are required by law to be paid by their employees, such payments are included in payroll. In additional to group insurance and pension plans, employer matching payments to Social Security, FICA and SUTA should not be included in payroll.

Value of Special Rewards for Invention or Discovery

These rewards are generally one-time payments for the invention or discovery of a new product, product line, or process which streamlines the company's procedures. To encourage employee participation, the rewards program is generally a part of the overall company benefit package. These rewards are not bonuses, although they may be treated as such by insureds - bonuses are included in payroll. These are one-time special payments when an employee discovers or invents something that will benefit the company.

Dismissal or Severance Payments

When an employee resigns, retires or is terminated, severance (dismissal) payments may be provided to the individual. A typical severance benefit will be 1 week pay for each completed year working for the company and such payments should not be included in payroll. However, part of the overall severance package could be payments for accrued holiday, vacation and sick pay. These payments are included in payroll as they have been earned by the employee. An auditor must verify that only the severance pay is being excluded and any accrued holiday, vacation and sick pay is included in payroll.

Payroll of Clerical Office Employees

There are two qualifications that an employee must meet for their payroll to be excluded as a clerical office employee:

 They must work in a physically separated office from the operative hazards of the business. This would typically be walls, floors or other partitions.

 Their duties must be strictly limited to maintaining the insured's book and records, conducting correspondence and other clerical tasks in the same physically separated work are. Acquiring a detailed job description is key to properly applying this exclusion. For example, an employee for a contractor may work 100% in the office, but if this employee is performing executive supervisor duties, these duties fall outside of the definition of the duties of a clerical office employee, and the payroll of this employee should be assigned to "Contractors - Executive Supervisors or Executive Superintendants," code 91580.

Payroll of Salespersons, Collectors or Messengers

 The payroll of these employees who work principally away from the insured's premises will be excluded from payroll. This exclusion contemplates the incidental clerical operations associated with these jobs.

 If any of these employees also work or supervise the work being performed, the entire payroll of such employees is included in payroll. For example, if the salesperson of a masonry contractor also supervises the masons performing the masonry work, the entire payroll of the salesperson is included in "Masonry," code 97447.

Payroll of Drivers and Their Helpers

 The payroll exclusion for drivers and their helpers applies only if the employee was hired principally as a driver or helper. Additionally, this exclusion only applies to the wages while driving. There is different application of this exclusion when compared to the exclusion for clerical office and outside salespersons. Clerical office and outside sales require the duties to be strictly limited to that particular type of work whereas the driver exclusion is based on principal duties. A couple of examples will clear this up.

 If an employee is hired by an excavation contractor principally as a dump truck driver, and all the employee does is drive the truck, this employee's entire wages are excluded. However, if $30,000 of this employee's wages was for dump truck driving and $10,000 was for filling in operating a backhoe, the $10,000 will be included in "Excavation NOC," code 94007. The $30,000 is excluded as the employee's principal duty is that of a dump truck driver.

 If you take the example above and reverse the employee's duties; $30,000 in payroll for operating the backhoe and $10,000 for driving the dump truck. Since this employee is hired principally to operate the backhoe, the driver's exclusion does not apply and the entire $40,000 in payroll is included in "Excavation NOC," code 94007.

Payroll of Aircraft Pilots or Co-Pilots

 This exclusion is treated the same are the exclusion for drivers - based on principal duties.

 If an employee is hired exclusively to operate the aircraft, the entire payroll is excluded.

 If an employee is hired primarily to operate the aircraft, and has other duties directly related to the insured's business, the payroll for the non-flying duties will be included in payroll, unless they qualify for one of the other exclusions (clerical, outside sales, and drivers).

 If an employee primarily performs work that is included in a payroll-based classification, and occasionally flies the aircraft - the entire payroll of such employees is included in the appropriate payroll-based classification.

Payroll of Drafting Employees

 The payroll of drafting employees is NOT excluded from the audit, only excluded from the payroll-based classification assigned to the insured's business. The payroll is included in "Draftsmen," code 91805. Additionally, the payroll of drafting employees is excluded from the payroll-based classification assigned to the insured's business only if such drafting employees are not exposed to the operative hazards of the insured's business.

 For example, if a drafting employee working for an architect exclusive works in the office, this employee's payroll is assigned to "Draftsmen," code 91805. However, if according to plans, the payroll will now be assigned to "Engineers or Architects - consulting - not engaged in actual construction," code 92663.

Payroll - Overtime

Rule 24.E.4 in ISO's General Liability Manual provides guidance in handling overtime pay. Rule 24.E.4.a defines what constitutes overtime and Rule 24.E.4.b explains what is excluded from overtime pay. The following is Rule 24.E.4.a:

Overtime means those hours worked for which there is an increase in the rate of pay:

 For work in any day or in any week in excess of the number of hours normally worked, or

 For hours in excess of 8 hours in any day or 40 hours in any week, or

 For work on Saturdays, Sundays or holidays.

In the case of guaranteed wage agreements, overtime means only those hours worked in excess of the number specified in that agreement.

The rule defines overtime as hours worked at an increased rate of pay, but then limits the scope of overtime only to when the number of hours worked exceed the standard hours worker (daily or weekly basis) and for work on Saturdays, Sundays and holidays. This definition leaves certain pay out of overtime, namely guaranteed wage agreements and shift differentials. Neither of these type payments, by themselves, qualifies as overtime. However, if an employee works excess hours that qualify as overtime, the excess may be excluded as overtime.

For example, an employee works at a job making $10 per hour. When the employee starts working the night shift, the employee receives $12 per hour with $2 being a shift differential. The $2 per hour is not overtime. If this employee works over 40 hours per week, the employee is paid time and one half and the rate increases to $18 per hour. The increase of $6 is premium overtime and should be excluded from payroll.

Rule 24.E.4.b follows up this rule by defining what is excluded as overtime pay, which is not the entire amount. The following bullets will bring out the key points:

. It is the insured's responsibility to keep their records so that the auditor can determine the premium overtime. The records must show the overtime pay separately either by employee or summarized by classification. It is not the auditor's responsibility to go through the insured's records and calculate the overtime on a weekly basis.

There are two methods for insureds to maintain their overtime payroll separately:

.  If the overtime records only show the premium, or additional, overtime pay - the entire amount should be excluded.

. If the total amount of overtime pay is included in overtime, the base pay plus the premium pay, only the premium pay will be excluded.

.  If the overtime is paid at time and one half, 1/3 of the total overtime pay will be excluded.

. If the overtime  pay is paid at double time, 1/2 of the total overtime pay will be excluded

.  It is very important for auditors to verify how much of the total overtime pay is being sparated in the insured's records. The auditor can spot check the records by dividing the hours worked into the regular pay and compare it to the same calculation for the overtime pay to determine what amount is included in the overtime pay

. Care should be taken in reviewing the amounts included in the overtime column of the insured's records as  this column is sometimes used for such items as bonuses, jury duty pay, shift differential, vacation pay or holiday pay.

. The overtime exclusion does not apply to stevedoring risks. For all stevedoring classifications, no overtime credits shall be given - even if the insured maintains proper payroll records.

Example: John Doe works in a manufacturing plant and receives an hourly rate of pay of $20.00. When John works in excess of the normal forty-hour week, he receives time and one-half, or $30.00 per hour. During the week, John worked 50 hours. The bookkeeper could calculate John's wages in either of the following ways:

Method 1

Method 2

50 hours @ $ 20.00

$ 1,000.00

40 hours @ $ 20.00

$ 800.00

10 hours @ $ 10.00

100.00

10 hours @ $ 30.00

300.00

Gross

$ 1,100.00

Gross

$ 1,100.00

While the gross wage for John is the same, the method of calculation overtime differs substantially. Method 1 shows only the premium overtime pay while Method 2 reflects the gross overtime pay. When an auditor is auditing an insured using Method 1, the total amount ($100.00 in this case) will be excluded. However, when encountering Method 2, 1/3 of the total amount ($300/3 = $100) will be excluded. This will ensure that the correct amount of overtime will be deducted no matter what the insured's' bookkeeping practices are.


TOTAL COST (Rule 24.F)

The definition of total cost is as follows: The total cost of all work let or sublet in connection with each specific project including:

1) The cost of all labor, materials and equipment furnished, used or delivered for use in the execution of the work, however, do not include the cost of finished equipment installed but not furnished by the subcontractor if the subcontractor does no other work on or in connection with such equipment; and

2) All fees, bonuses or commissions made, paid or due.

This is one of the most difficult premium bases to determine, which may be one of the reasons that it is frequently misapplied. Determining total cost usually necessitates a review of the job cost records of a contractor. It can be a time-consuming task which leads us to the frequent misapplication.

Shortcuts are often taken by including only the amounts shown in the general ledger or the cash disbursement journal under the heading of "Subcontractors". However, total cost also includes materials and equipment delivered for use in the execution of the work. This means that the auditor must also include the cost of materials and equipment that the insured furnishes to their subcontractors on the job.

Consider a situation involving the construction of a single-family, detached private residence in which the general contractor involved uses only subcontractors. Though many of the subcontractors will provide both labor and material in performing their tasks, the general contractor will also provide the equipment and many of the materials used on the project. The total cost of the residence is not only what is paid to the subcontractors (whether they provide their own materials or not) but also all the materials and equipment provided by the insured that is used in constructing the house.


TOTAL OPERATING EXPENDITURES (Rule 24.G)

Total operating expenditures is used as a basis of premium for only one type of risk, governmental subdivisions. The auditing of municipalities is unique as these risks have their own set of accounting principles. Thus, these risks are rated on total expenditures defined by Rule 24.G.1 in ISO's General Liability Manual as follows:

Total expenditures (including grants, entitlements and shared revenue) without regard to source of revenue during the policy period, including accounts payable.

This is one of the most difficult premium bases to determine, which may be one of the reasons that it is frequently misapplied. Determining total cost usually necessitates a review of the job cost records of a contractor. It can be a time-consuming task which leads us to the frequent misapplication.

Shortcuts are often taken by including only the amounts shown in the general ledger or the cash disbursement journal under the heading of "Subcontractors". However, total cost also includes materials and equipment delivered for use in the execution of the work. This means that the auditor must also include the cost of materials and equipment that the insured furnishes to their subcontractors on the job.

Consider a situation involving the construction of a single-family, detached private residence in which the general contractor involved uses only subcontractors. Though many of the subcontractors will provide both labor and material in performing their tasks, the general contractor will also provide the equipment and many of the materials used on the project. The total cost of the residence is not only what is paid to the subcontractors (whether they provide their own materials or not) but also all the materials and equipment provided by the insured that is used in constructing the house.

UNITS (Rule 24.H)

This basis of premium refers to the quantity of exposures involved, normally used with habitation classifications. The manual defines units as a single room or group of rooms intended for occupancy as separate living quarters by a family, by a group of unrelated persons living together, or by a person living alone. Examples of this are the various apartment building classifications. The size of each units or the total square footage of each unit does not matter. A studio apartment counts as one unit just as a three bedroom apartment would also count as one unit.

© Copyright 2018 Premium Audit Advisory Service (PAAS®), a division of Verisk Analytics. All rights reserved. No part may be reproduced or distributed without prior permission from PAAS®.

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